changes in the relationship between the financial and real sector

1

This project has received funding from the European Union’s Seventh Framework Programme

for research, technological development and demonstration under grant agreement no 266800

FESSUDFINANCIALISATION, ECONOMY, SOCIETY AND SUSTAINABLE DEVELOPMENT

Working Paper Series

No 105

Changes in the relationship between the financial and

real sector and the present economic financial crisis:

study of energy sector and market.

Franco Ruzzenenti

ISSN 2052-8035

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Changes in the relationship between the financial and real sector

and the present economic financial crisis: study of energy sector and

market.

Franco Ruzzenenti

Affiliations of authors: University of Siena

Abstract: The goal of D 3.08 to which this paper contributes, is to examine whether

financialisation has tended to increase price instability in international energy markets,

generating ‘price bubbles’, and whether these markets have been significant transmitters

of the effects of the financial crisis. The paper starts by briefly outlining the evolution of

energy markets’ regulation (oil, natural gas, coal and electricity) in Europe and in OECD

countries, from the late 1990 to now, with the aim of establishing whether liberalization has

led to: 1) price reductions, and 2) increased price (?) volatility. Empirical evidence suggest

that in all energy markets, since the 2000s, prices rose dramatically and volatility increased

slightly However, the most remarkable result is that in the 21st century, prices of energy

commodities began to be locked to the price of oil, showing a level of correlation not seen

in previous decades. A possible explanation for the synchronization of energy prices with oil

price lies in the “commodity bubble” in futures markets that occurred in the second half of

the 2000s. Nevertheless, according to most of the existing literature, oil markets in the long

run still seem to be dominated by spot markets rather than future markets, indicating that

fundamentals are pivotal in determining the price of oil. In order to test this, we performed

an analysis of the dynamical Hurst exponent of two crude oil (WTI and Brent) prices, spot

3



and futures, from the 1980s to now, on a daily basis, aimed at assessing the long memory

(autocorrelation) of returns.

Key words: Finance; Energy Markets; Financialisation of Energy Markets; Commodity

Bubble; Oil Price; Hurst Exponent; Multifractality.

Date of publication as FESSUD Working Paper: April, 2015

Journal of Economic Literature classification: C22; G10; Q43.

Contact details: [email protected]

Acknowledgments:

The research leading to these results has received funding from the European Union

Seventh Framework Programme (FP7/2007-2013) under grant agreement n° 266800.

[add any other acknowledgement, e.g. others who contributed to work, commented on

paper]

Website: www.fessud.eu

4



1. Introduction

When it comes to the concept of the real economy, as opposed to the financial economy,

nothing is more representative of the real, tangible, thus measurable, manifestation of

markets than commodities. Commodities are goods and services traded in units of mass or

volume, whereas products are sold in countable units. Crude oil, both in terms of mass and

value, is the most traded commodity in the world and gas is the second. Not only are oil and

gas the largest commodity markets in the world, but, in the modern economy, they are also

a major input of production, not to mention the key role they have played since the Second

World War onwards, in shaping the global geopolitical map.

In what follows, It will be shown how the financial sector beginning in the early 1980’s, used

energy commodities as a form of sustenance and how the financialisation of energy

markets accelerated in the late 2000’s.Yet, what do we mean by financialisation of energy

markets? Historically, financialisation in energy markets has unfolded itself along two main

lines: 1) the re-investment of revenues from royalties and profits deriving from a sudden

increase in the price (i.e., the petrodollars); 2) the development of financial derivative

instruments underlying the physical trades in commodity markets. In this paper we will

explore this latter form of financialisation. Finance invests in commodity markets in two

main ways: with Futures and Option Contracts.1 Future Contracts, rather than Option

Contracts dominate the commodity market and, therefore, are often taken as a measure of

the degree of financialisation (liquidity) of a commodity market and have received most

attention in academic research. In general, for example, to answer the question whether in

1 In finance Futures contract (more colloquially, Futures) is a standardised contract between two

parties to buy or sell a specified asset of standardised quantity and quality for a price agreed upon today (the

Futures price) with delivery and payment occurring at a specified future date, the delivery date. An Option

Contract, or simply Option, is defined as a promise which meets the requirements for the formation of a

contract and limits the promisor's power to revoke an offer (Wikipedia).

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a commodity market the price is determined by speculators or by producers/consumers, it

is customary to study the dynamic between Spot prices, representative of the

demand/supply mechanism, and Futures prices, indicating the behaviour of financial

operators. Futures and Spot markets compete, in a fashion which is often obscure and has

always attracted the attention of researchers, to determine the price on wholesale

markets, which ultimately impacts on retail prices. The aim of this study is to understand

how the financialisation of energy markets affected the dynamic of retail prices in the long

run, in terms of stability, transparency and trend.

The paper is structured as follows: in section 2) the four energy markets (oil, gas, coal and

electricity) are introduced, describing how the most important milestones in the process of

liberalisation and financialisation occurred in each market in recent decades. For every

sector, for a sample of countries and for the OECD and Europe, the long-term volatility

(quarterly-based) is observed together with the evolution of retail prices. In section 3) the

short-term, high-frequency (daily or hourly), volatility in the oil and electricity markets is

analysed with new statistical tools, in order to assess how financialisation affected price

fluctuations. In section 4) the correlation of energy prices with oil is analysed and how this

correlation evolved according to the process of financialisation of the markets. In section 5)

we draw some conclusions, with a particular focus on the new prospect for the market

price envisaged by an increasing share of renewable energy sources in the production mix

of the European electricity grid.

2. Energy markets and liberalisation

2.1. Oil and oil products

In the years 1986-88, most oil exporting countries switched from an administrated to a

market-related pricing system. This shift ended a time in which prices were first

administered by the large multinational oil companies in the 1950s and 1960s and then by

OPEC for the period 1973-1988. The first to switch to the market-based system was the

6



Mexican national oil company PEMEX in 1986 and by 1988, it had become the main method

for pricing crude oil in international trade:

The end of the concession system and the waves of nationalisation which

disrupted oil supplies to multinational oil companies established the basis of

arm’s-length deals and exchange outside the vertically and horizontally integrated

multinational companies. The emergence of many suppliers outside OPEC and

many buyers further increased the prevalence of such arm’s-length deals. This led

to the development of a complex structure of interlinked oil markets which consist

of Spot and also physical Forwards, Futures, Options and other derivative markets

referred to as paper markets. Technological innovations which made electronic

trading possible revolutionised these markets by allowing 24-hour trading from

any place in the world. It also opened access to a wider set of market participants

and allowed the development of a large number of trading instruments both on

regulated exchanges and over the counter (Fattouh, 2011).

The derivatives on oil and oil products were the first to be traded on international markets.2

The two major markets for oil are the New York Mercantile Exchange (NYMEX) for WTI oil

and the Intercontinental Exchange (ICE) (USA and Europe) for Brent oil3 The NYMEX is a

2 Initially Future Contracts were developed and Options followed. Today, in terms of volume, Futures

are the dominant derivative market (Table 1). Nevertheless, in the process of price formation, both Options

and Futures play a determinant role. In the Brent market, for example, the oil price in the Forward market is

priced as a differential to the price of the Brent Futures Contract using the Exchange for Physicals (EFP)

market. The price of Brent priced as a differential to the Forward market through the market of Contract for

Differences (CFDs), a Swap market (Fattouh, 2011).

3 Two other important markets, though marginal for traded volumes compared to NYMEX and ICE,

are TOCOM in Japan (with a daily volume of 3999 lots in 2013) and DME in Dubai (with a daily average volume

of 9000 lots in 2014). Nevertheless, since 2009 DME switched to one of the leading platforms, CME Globex.

This helped make the access to the DME contracts easier for market participants, as all three benchmarks

(WTI, Brent and DME Oman) can be traded on the same electronic platform.

7



commodity Futures exchange owned and operated by the CME Group of Chicago. Trading

of WTI crude oil Futures at the NYMEX began in March 1983, following five years of Futures

trading on heating oil which began in November 1978. The ICE became a centre for global

petroleum risk management and trading with its acquisition of the International Petroleum

Exchange (IPE) in June 2001, which is today known as ICE Futures Europe. The IPE was

established in 1980 in response to the immense volatility that resulted from the oil price

shocks of the 1970s. As the IPE’s short-term physical markets evolved and the need to

hedge emerged, the exchange offered its first contract: gas oil Futures. In June 1988, the

exchange successfully launched the Brent crude Futures Contract. Today, the ICE’s FSA-

regulated energy Futures exchange conducts nearly half the world’s trade in crude oil

Futures. In 2010, the daily average volume traded of ICE- Brent exceeded 400,000 contracts

or 400 million barrels, more than five times the volume of global oil production (Fattouh

2011).4 The remaining Futures on crude oil are traded predominantly at NYMEX. The

monthly average volume of Light Sweet Crude Oil Futures (WTI) traded at NYMEX exceeds

14 million contracts or 14 billion barrels. On a daily basis, this amounts to more than 475

million barrels of oil, around 6 times the size of daily global oil production (Fattouh, 2011).5

In contrast to the Brent market, trading in the US pipeline market is smaller with typical

volumes of around 30,000 barrels compared to 600,000 barrels in the Brent market.

Nevertheless, the US market has maintained its liquidity despite the decline in physical

production. In 2009, the combined Spot-market traded volume for twelve US domestic

grades stood at more than 1.8 mb/d (milion barrells a day) which is much higher than other

benchmarks including Brent, Oman and Dubai (Fattouh, 2011).

4 Only few of Futures contacts translate into physical delivery, i.e. Forward markets, for Brent. In

2010, the daily average of Forward Contracts were 1.4 million b/d.

5 Unlike the Brent Futures Contract, the Light Sweet Crude Oil Futures Contract is fully physically

delivered for every contract left open at expiry by default. It is important to note though that only a small

percentage of the volume traded is physically settled with most of the physical settlement occurring through

the Exchange for Physicals (EFP) mechanism.

8



In April 2005, the entire ICE portfolio of energy Futures became fully electronic and the high

profile and historic ICE trading floor was closed. In the years 2006–2008 the shift from a

primarily telephone/open outcry trading platform (Pit) to a computer/electronic order

matching platform (IT technologies) led immediately to an upswing in future transactions

(Irwin and Sanders, 2012). On the ICE, for example, contracts doubled in two years, from

2006 to 2008 (Figure 1). On the NYMEX, where IT technologies became effective later, the

shift occurred in 2007.

Therefore, the roadmap to the financialisation of the oil market can be sketched as follows:

1. In 1971, Nixon declares the non convertibility of dollar.

2. 1978-83, first derivatives on oil and oil products at NYMEX

3. In 1986-88, there was a shift towards a market-related pricing system from a system

of prices administered initially by large multinationals in the 1950s and 1960s and

then by OPEC from 1973-88.

4. 2005, the ICE becomes a public company.

5. 2005-2008, implementation of the computer trading system.

6. 2007, first Oman Crude Oil Futures Contract launched at Dubai Mercantile

Exchange (DME)

7. 2008, the NYMEX is acquired by CME group and TOCOM became a for-profit stock

company.

What was the effect of the process of deregulation and financialisation of the global oil

market on local retail prices of oil products? In Figure 2, we show the price of diesel for

selected OECD countries, from 1980 to 2014. From 2001 to 2014, prices increased

dramatically and the volatility of log of returns increased by 24% in Europe and 39% in

OECD countries.

2.2. Natural gas

Natural gas is the most important energy commodity, for daily volumes, after crude oil and

oil products at NYMEX and ICE (Table 1). Nevertheless, in difference to oil, gas is also

traded locally. This is why gas is generally considered a regional market while oil is a truly

9



global market. The financialisation of gas started in the early 1990s, when NYMEX launched

the first Futures Contracts on natural gas (NG). Natural gas Futures, including the most

popular Henry Hub Futures, trade on the NYMEX and the Chicago Mercantile Exchange

(CBOT) in the United States. A contract represents 10,000 million British thermal units

(mmBtu) and trade under the symbol “NG”. These are highly liquid, extremely active

contracts that trade throughout the year. Contracts are listed for the current year plus the

next 12 years and are priced in dollars and cents per mmBtu. The contract is based on

delivery at the Henry Hub in Louisiana—where 16 natural gas pipelines converge. Natural

gas Futures also trade on the ICE, which offers both UK Natural Gas Contracts and Title

Transfer Facility (TTF) Futures. The Multi Commodity Exchange (MCX) in India and the

TOCOM in Japan also offer natural gas Futures throughout the year.

In Europe, liberalisation of the market began in the late 1990s, with the first of two

European Union directives concerning gas (98/30/EC and 2003/55/EC). Generally, the

trading of gas and related financial derivatives became effective with the rise, in the first

half of the 2000s, of companies managing electricity wholesale markets, such as Powernext

(France), Nord Pol (Norway, Sweden, Netherlands), OMIE (Spain), EPEX (France and

Germany), ENDEX (Netherlands), EXXA (Austria), GME (Italy). These companies, formerly

public agencies, provided the platform for the trading of energy commodities, Futures and

Options, from electricity, gas and Emission Trading System (ETS). Nevertheless, the

liquidity of the gas market in Europe is still very low, with the exception of the UK and the

NL (Figure 3). After the rush to gas of the 1990s, it seems that gas is becoming less

attractive for European and American power utilities which might partially explain the

difficulties of the gas market to take off.6

6 “In 2013, global natural gas demand gained only 1.2%, reaching around 3 500 billion cubic metres

(bcm). Against the backdrop of a sluggish economic economy, competition from coal and renewable energies

in the power generation sector and supply constraints, consumption increased less than forecast in the

previous Medium-Term Gas Market Report (MTGMR) for that year (1.6%). There is nothing new in gas being

10



In the US and the UK, gas prices are set in competitive short-term gas markets (Henry Hub

and National Balancing Point). In continental Europe, prices for imported gas are

related to oil prices by formulas, but this is changing due to the pressure from current

lower short-term markets, such as the above mentioned European energy exchanges

companies (Mitchel and Mitchel, 2014).

Nevertheless, competition on wholesale markets seems to have failed to spare the UK from

soaring prices in NG (Figure 4). Furthermore, volatility in Europe increased in the last 15

years, both on prices (20%) and on log returns (29%). However, it is worth noting that the

increase in volatility in gas regional markets is also due to the price of oil. Recent studies

suggest that the volatility of international crude oil prices has a negative impact on regional

natural gas import prices and the shock impact is weak in North America and stronger in

Europe and that this correlation increased in the 21st century (Quiang et al. 2014; Brigida,

2014; Nick and Thoenes, 2014).

2.3. Coal

Coal is the second primary energy source after oil worldwide, in OECD countries and even

in the European Union (IEA, 2014b). While the United States has the world’s largest

reserves of coal, China has been the world’s leading producer of coal since the early 1980s.

It currently produces nearly half of the world’s coal. In 2013, total world production of coal

was 6986 Mt, with Chinese production accounting for 3567 Mt, followed by USA with 935 Mt

and India with 595 Mt. Global trade has been growing faster than global consumption on a

relatively consistent basis, which comprises regional trade data as a portion of the

corresponding consumption (IEA, 2014b). Global exports reached a record share of total

consumption of 21.7% in 2013, up from 11.0% in 1980, 16.5% in 1990 and 18.4% in 2000. In

one sense, this can be explained by globalisation, as while World total primary energy

supply (TPES) for steam and coking coal combined, grew by 308% since 1971, combined

exports grew by 811%. Major exporters are Indonesia (426 Mt), Australia (336 Mt) and

outpaced by coal and renewable electricity generation; this has been the case over the past decade, but it is

unusual that gas demand growth is behind oil too, which increased by 1.4% in 2013.” (IEA, 2014a)

11



Russia (140 Mt). Coal worldwide is considered a substitute for gas in power generation and

the soaring costs of gas were partially responsible for an increasing demand for coal in

OECD countries and in fast developing economies.

Although trades in coal increased in recent decades, coal is still the least financialised

energy commodity and contracts are prominently bilateral and its market regional. The

NYMEX only started trading Futures on coal in 2001 and currently, the top ten energy

products at NYMEX don’t comprise coal Futures (Table 1).

Nevertheless, since coal is now the largest single power generating fuel in the United

States, the once relatively stable market in coal has become more volatile. Thus, electric

utilities are no longer eager to enter into long-term coal supply contracts that were once

the industry norm. Instead, there is now a preference for short-term and more price-

flexible contracts. In Europe, the once regional and state-controlled market, with

significant price spreads across countries, prices began to converge in the late 1990s, after

a process of market deregulation and privatisation in Germany, the UK, Poland and Estonia

(Figure 5). A further thrust toward price volatility came in the late 2000s, from the largest

coal market in the world, China. Since China decontrolled coal prices in the second half of

the 2000s, its coal price has risen steadily and been unusually volatile (Chi-Jen et al., 2012).

These coal-price fluctuations could be symptomatic of a major change in the pricing

dynamics of global fossil-fuel markets, with increasing correlation between coal and oil

prices globally. Nevertheless, in Europe, volatility of log-returns has decreased by 11%

from 2001-2013, compared to the decades 1980-2000. In OECD countries, price volatility

increased in the lag 2001-2013 compared to 1980-2000 by 16% and 14% on log returns

remained (Figure 6).

2.4. Electricity

Electricity is a very peculiar energy commodity: it is not storable and it has high costs of

transmission due to physical constraints (15% losses on average). Therefore, until recently

electricity has always been a public monopoly. Since the second half of the 1990s, European

12



electricity networks have underwent an extensive liberalisation process and have changed

their structure from a regulated monopoly to a competitive open market. At the end of

1996, the first EU Directive on electricity (1996/92/EC), later replaced by the second

Directive (2003/54/EC), set the initial common rules for the creation of an internal

competitive electricity market. Most European markets started functioning between 2002

and 2004.7 Parallel to the process of liberalisation in the EU, the USA has also undertaken

its own deregulation and privatisation of the electricity sectors. Now, in the USA, 5 major

companies trade electricity, the most important of which is PJM. PJM Interconnection was

established in 1997 as the first bid-based energy market in the United States. It has

since evolved into the largest deregulated wholesale electricity market in the world

(Longstaff and Wang, 2004).

What is a wholesale electricity market? National wholesale electricity markets are

generally composed of the Spot Electricity Market, the Forward Electricity Market and the

Platform for physical delivery of financial contracts concluded on the IDEX. The IDEX is the

segment of the financial derivatives market organised and managed by national stock

exchanges, where financial electricity derivatives are traded. In Europe, the Spot electricity

markets comprises the Day-Ahead Market and the Intra-Day and Compensations Markets.

In spite of decreasing electricity consumption, the traded volume of day-ahead power

contracts on European trading platforms grew until 2013 (EU, 2013). Figures show that the

liberalisation of the electricity sector in Europe was successful and the liquidity of the

European wholesale electricity market has now reached a level of above 50%, meaning that

more than half of the electricity consumed in Europe was traded on markets (Fig 6).

Nevertheless, the market succeeded in reducing the volatility of retail prices for both, the

household and the industry sectors, but failed in reducing the cost of energy (Fig 7 and 8).

Volatility in the household sector grew slightly by 5% in the period 2001-2013 compared to

7 A list of companies operating in Europe is mentioned in section 2.2

13



1980-2000, in Europe but decreased by 5% in the OECD. However, volatility in the industry

sector grew during the same period both in Europe and in OECD countries.

3. Instability and efficiency in the oil market.

In the previous section, we observed the volatility of retail prices on a quarterly basis and

over a long range of time, comparing two times periods: 1980-2000 with 2001-2013.

However, this is an imprecise measure of volatility and may underestimate the effect of

financialisation on market volatility. In wholesale markets, commodities or financial

derivatives are traded daily and hourly. Energy markets have traditionally been very

volatile. High volatility levels, irregularity in production and seasonal effects make hedging

of paramount importance. Financial derivatives such as Futures or Forward Contracts,

Futures Contracts, for example, at expiring date (maturity) must match Spot Contracts and

these latter should, in principle, reflect market fundamentals. The theory of storage

postulates that basis as well as Futures spread is related through the cost of storage, the

convenience yield and the risk premium, which arises from holding a physical commodity

in inventory form (Maslyuk and Smyth, 2009). Nevertheless, in the short-run, Futures

Contracts, during their life, can significantly depart from their price of their underlying

commodity. Therefore, spread between Spot and Futures can fluctuate significantly.

Volatility in finance is a measure of the variation of prices or returns (the ration between p2

and p1 between the time interval t2-t1), and it is customarily assessed with the standard

deviations on the logarithm of returns. This measure, however, is affected by the trend in

prices and it assumes normal distribution, therefore, it is a biased estimation of the

instability of prices/returns. Hence, in this section we will investigate the instability of

prices with a more refined measure, based on the study of fractality of time series, the

14



Hurst exponent (Mandrelbot, 1997). 8 The present analysis will address high frequency

time series of Spot and Futures Contracts of oil, for WTI and Brent, on a daily basis,

between 1980 and 2013. We investigate, by evaluating the generalised Hurst exponent,9

dynamically computed over a moving time-window, the level of stability/instability of log

returns of Futures and Spot prices (Morales et al, 2012). The Hurst exponent scores 0.5

when a time series is random (Brownian motion) and between 0.5 and 1 when it is

8 “The Hurst exponent is used as a measure of long-term memory of time series. It relates to the

autocorrelations of the time series, and the rate at which these decrease as the lag between pairs of values

increases. Studies involving the Hurst exponent were originally developed in hydrology for the practical

matter of determining optimum dam sizing for the Nile River's volatile rain and drought conditions that had

been observed over a long period of time. In fractal geometry, the generalised Hurst exponent has been

denoted by H or Hq in honor of both Harold Edwin Hurst and Ludwig Otto Hölder (1859–1937) by Benoît

Mandelbrot (1924–2010). H is directly related to fractal dimension, D, and is a measure of a data series' "mild"

or "wild" randomness. The Hurst exponent is referred to as the "index of dependence" or "index of long-range

dependence". It quantifies the relative tendency of a time series either to regress strongly to the mean or to

cluster in a direction. A value H in the range 0.5–1 indicates a time series with long-term positive

autocorrelation, meaning both that a high value in the series will probably be followed by another high value

and that the values a long time into the future will also tend to be high. A value in the range 0 – 0.5 indicates a

time series with long-term switching between high and low values in adjacent pairs, meaning that a single

high value will probably be followed by a low value and that the value after that will tend to be high, with this

tendency to switch between high and low values lasting a long time into the future. A value of H=0.5 can

indicate a completely uncorrelated series, but in fact it is the value applicable to series for which the

autocorrelations at small time lags can be positive or negative but where the absolute values of the

autocorrelations decay exponentially quickly to zero. This in contrast to the typically power law decay for the

0.5 < H < 1 and 0 < H < 0.5 cases (Wikipedia)”.

9 “The generalised Hurst exponent is a tool to study directly the scaling properties of the data

via the qth-order moments of the distribution of the increments and it is associated with the long-term

fundamental statistical quantities which turn out to be the qth-order moments of the distribution of the

increments (Morales, 2012)”

15



persistent (positive autocorrelation). When the Hurst exponent is lower than 0.5, it means

that a time series is anti-persistent, i.e. more unstable than a random walk, though more

predictable (Mandelbrot, 1997).

3.1 Oil Futures market: Generalised Hurst

Autocorrelation in oil Futures markets has received growing attention in recent years by

the scientific milieu. The interest has mainly focused on establishing whether the market

was efficient or inefficient, i.e., according to the economic theory, if the Hurst exponent

signalled a random walk or not.10 The underlying concept is that in a fully efficient market,

returns on Futures, filtered by the trend and settled by the fundamentals, should be

random and unpredictable. Futures should only pay a premium for the risk and the cost of

storage.

Although there is general consensus on the fact the oil markets are inefficient, it is still

unclear whether the autocorrelation (long memory) is persistent or anti-persistent (Serletis

and Rosenberg, 2007; Zanotti et al. 2009; Wang and Wu, 2012). Some studies found that

energy Futures returns are weakly persistent (Alvarez-Ramirez et al, 2002, 2008; He and

Chen, 2009; Calum and Turvey, 2010). Other studies suggest that the particular form of long

memory of log-returns is anti-persistent, characterised by the variance of each series

being dominated by high frequency components (Serletis and Rosenberg, 2007; Elder and

Serletis, 2008).

10 For the scope and the sake of the present analysis, the question of multifractality of time series,

that is, of the different fractal dimension of different time scales of the series, will not be addressed. A

multidimensional time series means that a series might be random above a certain time interval. For

example, some studies found that Futures oil prices are random on the time scales of weeks (Alvarez-

Ramirez et al., 2002; He and Chen, 2009). Nevertheless, this is still a debated issue and it would require a

more profound analysis that goes beyond the time constrains of the present study.

16



We analysed 4 Futures markets from 1982 to 2014 on a daily basis,11 for WTI crude oil and

Spot crude oil (Brent and WTI) (Table 4). Spot and Futures markets, for oil (Brent and WTI)

and for oil products, are found to be generally anti-persistent, but, notably, financialisation

led to a decrease in the stability of prices, marked by a sharp increase of the Hurst

exponent in all markets, beginning in 2000 (Fig 9) . Notably, the Hurst exponent remained

stable overall until 2008 when it received a further thrust, though not very pronounced.

Since 2008, indeed, in most of the markets analysed, the Hurst exponent fluctuates around

0.5, signalling that the market became efficient, i.e., purely random.

3.2 Oil Futures market: Multifractality

A multifractal system is a generalisation of a fractal system in which a single exponent (the

fractal dimension) is not enough to describe its dynamics. In the field of time-series

analysis this can be broadly translated into the existence of more than one H on different

time-scales. This happens when H(q) is a non-linear function of the generalised exponent q

and the time series is a multifractal system. In this case, the scaling behaviour can be

observed for many interlocked fractal subsets of the time series (Kantelhardt, 2011). When,

for example, a two-dimensional process scales the exponents describing the scaling

behaviour in the same range of time scales, that system displays autocorrelation (memory)

on both long-range and short-range scales.

Figures 10 and 11 show the multifractality for the Spot Contracts of Brent and WTI at

NYMEX. Figures 12 to 15 show the multifractality for the Futures Contracts1 to 4 at

11 NYMEX, Crude Oil: Light-Sweet, Cushing, Oklahoma. Specific domestic crudes with 0.42% sulfur by

weight or less, not less than 37° API gravity nor more than 42° API gravity. The following domestic crude

streams are deliverable: West Texas Intermediate, Low Sweet Mix, New Mexican Sweet, North Texas Sweet,

Oklahoma Sweet, South Texas Sweet. In addition, specific foreign crudes of not less than 34° API nor more

than 42° API. The following foreign streams are deliverable: U.K. Brent and Forties, and Norwegian Oseberg

Blend.

17



NYMEX.12 The difference between H(1) and H(1.5) is zero when the time series is uni-

fractal. It is interesting, but not surprising, that all the series show multifractality. What is

of paramount interest, and somehow unexpected, is that for all the series the difference

between H(1) and H(1.5) utures declines along the timeline, approaching zero in the last

decade. It is noteworthy that in the Spot Market, foremost for Brent, the difference drops

sharply after 2004. However, 2004 seems to be a turning point also for the Futures-

Contract 1 (one month ahead). These results suggest that the scale of autocorrelation in all

markets converged, meaning that the behaviour (comprising the volatility) of the series on

long and short time scales becomes similar. This hints to a collapse of long-term and

short-term dynamics of the series, particularly for Spot Brent and Futures Contract 1, but

more research is needed. Indeed, the fact that the year 2004 is clearly a turning point in the

multifrractality, but not on the dynamical Hurst (Figure 9) for Spot and Futures Contract 1 is

highly informative in relation to the underlying process that affects the scaling behaviour of

the series (the interplay between short-term and long-term behaviour). However, this

result must be addressed with a more profound and detailed analysis.

4. Correlation with oil price and financialisation of commodities markets

After the first wave of liberalisations which occurred mainly in the US and the UK during the

1970s and the 1980s, the energy sector underwent a second, more profound, course of

liberalisation/deregulation that began in the 1990s but became fully effective in the

beginning of the 21st century. Indeed, the 21st century, as was previously highlighted,

witnessed the dramatic rise of the financialisation of the energy sector. The financialisation

process followed two main lines: on a global scale, with the flourishing of international

12 For crude oil, each contract expires on the third business day prior to the 25th calendar day of the

month preceding the delivery month. If the 25th calendar day of the month is a non-business day, trading

ceases on the third business day prior to the business day preceding the 25th calendar day. After a contract

expires, Contract 1 for the remainder of that calendar month is the second following month. Contracts 2-4

represent the successive delivery months following Contract 1.

18



markets (NYMEX, ICE, Dubai, TOCOM) and the upturn of volumes of trades on financial

products based on energy commodities; on a regional/national scale, with the advent of

electricity/gas wholesale markets.

Deceptively, the financialisation of the energy sector did not lead to a decrease in retail

energy prices. On the contrary, energy prices soared in the 21st century, and even after the

2008 global crisis, after a momentary collapse in demand, began increasing again. Volatility

also generally increased. Many argue that this was the effect of oil prices, to which most

energy commodities are still attached through regional price indices or structural reasons,

like generating costs (Mohammadi, 2009; Oberndorfer, 2009; Fattouh, 2010, Ji et al., 2014;

Brigida, 2014). In this view, fundamentals, that are inflating oil costs because of the

pressure on resources demand exerted by fast rising economies, would be underpinning

the present increasing trend in energy commodities. This is indisputably true, but it might

not be the end of the story. Figures 16 and 17 depict the retail energy prices compared to oil

(prices at import costs) for European OECD countries (Fig 16) and for OECD countries (Fig

17). It is striking how prices start swinging univocally from the early 2000s. In Tables 2 and

4, the volatility and correlations (Pearson correlation index) between energy commodities

and oil prices in the two time-spans: 1980-2000 and 2001-2013 is reported. Remarkably, all

energy commodities show a correlation above 90% in the second time-span, compared to

weaker correlations or even negative correlations, like in the case of electricity and

household gas.

4.1 The financialisation of Futures market and the commodity bubble

As it was previously highlighted, volumes in oil Futures, after decades of stagnancy, began

steadily increasing in the mid 2000s and sky rocketed before the crisis. However, this bull

cycle was not limited to Future energy markets. Since the early 2000s, commodity Futures

This phenomenon, in the literature and in the financial milieu, is sometimes named: the

19



commodity bubble (Winters, 2008; Tang and Xiong, 2010; UN, 2011; Irwin and Sanders,

2012). How did the commodity bubble begin? There are five main factors:

1. Bull cycle: during periods of strong economic performance, especially driven by fast

growing, emerging countries, the commodity markets tend to appeal to institutional

investors hedging against inflation (Winters, 2008; UN, 2011)

2. Cassandra’s voice: in the early 2000s, academic literature highlighted that

commodity Futures Contracts exhibit the same average returns as investments in

equities, while over the business cycle their returns are negatively correlated with

those on equities and bonds, attracting the attention of institutions and pension

funds. Institutional investors, after the collapse of equity markets, were looking for

safe investments and the widely publicised discovery of a small negative correlation

between commodity returns and stock returns led to a belief that commodity

Futures could be used to reduce portfolio risk (Gorton and Rouwenhorst, 2006).

3. IT technology: trades on Futures were boosted by the new electronic platform that

dramatically reduced costs of transactions and enhanced access to the market

(Sanders, 2010).

4. Financial innovation: financial innovation has played a facilitating role, for example,

tracking commodity indexes, such as the Standard and Poor’s Goldman Sachs

Commodity Index (S&P GSCI).

5. Market Deregulation: commodity market deregulation in the USA, as enacted by the

Commodity Futures Modernization Act (CFMA) of 2000, was a further facilitating

factor.13

13 “The Commodity Futures Modernisation Act of 2000 (CFMA) is United States federal legislation that

officially ensured modernised regulation of financial products known as over-the-counter derivatives. It was

signed into law on December 21, 2000 by President Bill Clinton. It clarified the law so that most over-the-

counter (OTC) derivatives transactions between “sophisticated parties” would not be regulated as “Futures”

under the Commodity Exchange Act of 1936 (CEA) or as “securities” under federal securities laws. Instead,

20



The effects of the financialisation of commodities are still debated, some claim that their

traditional functions have been altered by speculative traders. Commodity Futures markets

are meant to facilitate the transfer of price risk from producers and consumers to other

agents that are prepared to assume the price risk. These functions are “impaired to the

extent that trading by financial investors increases price volatility and drives prices away

from levels that would be determined by physical commodity supply and demand relation-

ships” (UN, 2011). There is a different view which claims that financialisation had positive

effects on commodity markets. According to this view, the expanding market participation

may have: decreased risk premia and the cost of hedging, reduced price volatility, and

enhanced the integration of commodity markets with financial markets (Irwin and

Sanders, 2012). Nevertheless, it seems indisputable that the commodity bubble contributed

significantly, albeit it was not the main factor, to the hike in oil prices that occurred in 2008.

According to the hedge fund manager Michael W. Masters, index investment created a

massive bubble in commodity Futures prices (Masters and White, 2008):

‘‘Institutional Investors, with nearly $30 trillion in assets under management,

have decided en masse to embrace commodities Futures as an investable asset

class. In the last five years, they have poured hundreds of billions of dollars into

the commodities Futures markets, a large fraction of which has gone into

energy Futures. While individually these investors are trying to do the right thing

for their portfolios (and stakeholders), they are unaware that collectively they are

having a massive impact on the Futures markets that makes the Hunt brothers14

pale in comparison. In the last four and half years assets allocated to commodity

index replication trading strategies have grown from $13 billion in 2003 to $317

billion in July 2008. At the same time, the prices for the 25 commodities that

derivatives supervised by their federal regulators under general “safety and soundness” standards

(Wikipedia)”.

14

21



make up these indices have risen by an average of over 200%. Today’s

commodities Futures markets are excessively speculative, and the speculative

position limits designed to protect the markets have been raised, or in some

cases, eliminated.’’15

Nevertheless, there was a further effect of financialisation on Future commodity markets

that went almost unnoticed: the astonishing increasing correlation between the price of

commodities with the price of oil. Tang and Xiong (2010) found that “concurrent with the

rapid growth of index investment to commodities markets, prices of non-energy

commodities became increasingly correlated with oil prices [..]. This finding reveals a

fundamental process of financialisation amongst commodities markets, through which

commodity prices became more correlated with prices of financial assets and with each

other. This result also helps explain the synchronised price boom and bust of a large set of

seemingly unrelated commodities in 2006-2008”. According to their studies, the increasing

correlation with oil prices concerns index-related commodities. For example, Figure 18

depicts average return correlations of commodities in the Goldman Sachs Commodity Index

(GSCI) and Dow-Jones UBS Commodity Index (DJ-UBS) and commodities off these indices.

They found that Futures prices of non-energy commodities became increasingly correlated

with oil after 2004 and that this trend was significantly more pronounced for indexed

commodities than for those off the indices.

15 Beginning in the early 1970s, Hunt and his brother William Herbert Hunt began accumulating large

amounts of silver. By 1979, they had nearly cornered the global market. In the last nine months of 1979, the

brothers profited by an estimated $2 billion to $4 billion in silver speculation, with estimated silver holdings of

100 million troy ounces (3,100,000 kg). During the Hunt brothers' accumulation of the precious metal, prices

of silver Futures Contracts and silver bullion during 1979 and 1980 rose from $11 an ounce in September 1979

to $50 an ounce in January 1980. Silver prices ultimately collapsed to below $11 an ounce two months later.

The largest single day drop in the price of silver occurred on Silver Thursday. Hunt filed for bankruptcy under

Chapter 11 of the Federal Bankruptcy Code in September 1988, largely due to lawsuits incurred as a result of

his silver speculation (Source: Wikipedia).

22



The explanation is that index investors typically focus on strategic portfolio allocation

between the commodity class and other asset classes such as stocks and bonds, they tend

to trade in and out of all commodities in a chosen index at the same time (Tang and Xiong,

2010). Commodities in the index, therefore, should immediately be synchronised with

fluctuations on financial markets by means of speculative, though risk-averse, movements

of index investors.16 Likewise, the increasing financialisation of Future energy markets,

through the same mechanism, would increase the co-movement of energy Futures with

financial markets and thereby, with oil prices.

4.2 The role of paper markets in the price formation of oil

Although the theory on the synchronisation of commodity markets is supported by strong

evidence, it still remains inexplicable why everything should be correlated to oil? If

financialisation of commodities paved the way for a deeper integration of markets, and

therefore, of energy markets, why did oil emerge as the bench mark? And if oil is the bench

mark, a notion that is as trivial as uncompromising, where does the driving force leading

the markets lie? Is it in speculators operating in oil markets or in fundamentals?

Indeed, the answer to this question rests on three unspoken assumptions:

1. Future prices lead Spot prices in energy markets.

16 “A number of studies find evidence of commodity price bubbles. Analyses show that position-

taking by index investors, that passively replicate the price movements of an index based on a basket of

commodities, has an impact on price developments, particularly of crude oil and maize. The fact that these

effects are persistent – especially in the case of crude oil – points to the presence of herd behavior

[..].Financial investors are usually active in several financial markets at the same time. Information collected

in one market or for the economy as a whole tends to be used to form expectations about the significant price

swings in other markets, regardless of the specifics of supply and demand in the latter. This mechanism

creates new or reinforces existing cross-market linkages, and it increases or alters correlations between two

asset classes. An increasing correlation between two markets over time indicates that the markets have been

moving more and more in tandem”(UN, 2011).

23



2. Financial markets are strictly correlated to oil prices.

3. Oil price is univocally determined on a global scale.

The question whether Spot prices determine Futures prices or, vice-versa, are affected by

them, links to the more fundamental question of whether commodity markets are driven by

fundamentals of the economy or financial speculation. The correlation of the economy, and

thereby financial markets, to oil price is also a complex issue and goes beyond the interplay

of structural and financial factors in the energy sector. It has been subject to vast interest

from the scientific community, foremost during or in the immediate aftermath of the

economic crisis, yet, the reason why the economy is so bound to the price of oil, is somehow

still debated (Hamilton, 2013). Several studies found that prices for crude oil from different

parts of the globe are correlated (Gulen, 1999; Ewing and Harter, 2000; Bachmeier and

long-run tight relationship among oil prices and their derivatives implies that the world oil

question, where do innovations in world oil prices enter the market?

Kaufmann and Ullman(2009), traced the correlation and the Granger causality17 among Spot

and Futures crude oil prices across different regions of the world with the aim of testing

the hypothesis of the role of speculation vs. market fundamentals. If the hypothesis about

the importance of market fundamentals is correct, we would expect to see price

innovations enter the oil market via Spot markets. They found that the rise in crude oil

prices through March 2008 was driven in part by market fundamentals and that the Spot

price for Dubai–Fateh was the “gateway for innovations”. The finding that this latter crude

oil was driving innovations in oil prices after 2008, seems to support the arguments for the

17 “The Granger causality test is a statistical hypothesis test for determining whether one time series

is useful in forecasting another. Ordinarily, regressions reflect mere correlations, but Clive Granger argued

that causality in economics could be reflected by measuring the ability of predicting the future values of a

time series using past values of another time series. Since the question of true causality is deeply

philosophical, econometricians assert that the Granger test finds only predictive causality (Wikipedia)”.

24



importance of demand growth in developing nations, where this oil is benchmark for

bilateral contracts. Nevertheless, they also found evidence of weak causality going from

Futures to Spot markets, with growing relevance after September 2004, to conclude that:

“together, these results suggest that market fundamentals initiated a long-term increase

in oil prices that was exacerbated by speculators, who recognised an increase in the

probability that oil prices would rise over time.” (Kaufmann and Ullman, 2009; Kaufmann,

2011).

However, Fattouh(2010;2011) argues that the dichotomy between Spot- and Futures

markets as a tool to identify the role of financial speculation versus the role of

fundamentals is not well founded. He highlights that, on the one hand, financial

instruments enter directly into the price formation process of most of crude oil prices,18

while on the other hand, financial markets, like Forward markets and some Option markets

(i.e, the CFDs), are still dominated by operators in the oil sector,19 that is, by physical

traders rather than financial players.

18 “Since physical benchmarks constitute the pricing basis of the large majority of physical

transactions, some observers claim that derivatives instruments such as Futures, Forwards, Options and

Swaps derive their value from the price of these physical benchmarks, i.e., the prices of these physical

benchmarks drive the prices in paper markets. However, this is a gross over-simplification and does not

accurately reflect the process of crude oil price formation. The issue of whether the paper market drives the

physical or the other way around is difficult to construct theoretically and test empirically and requires further

research.” (Fattouh, 2011).

19 “In recent years, the Futures markets have attracted a wide range of financial players including

Swap dealers, pension funds, hedge funds, index investors, technical traders, and high net worth individuals.

There are concerns that these financial players and their trading strategies could move the oil price away

from the true underlying fundamentals. The fact remains however that the participants in many of the OTC

markets such as Forward markets and CFDs which are central to the price discovery process are mainly

physical and include entities such as refineries, oil companies, downstream consumers, physical traders, and

market makers. Financial players such as pension funds and index investors have limited presence in many of

these markets. Thus, any analysis limited to non-commercial participants in the Futures market and their

role in the oil price formation process is incomplete and also potentially misleading. (Fattouh, 2011).

25



Futures markets determine the oil price in two ways: 1) directly, by the benchmarking

system of long term, bilateral contracts; 2) indirectly, by the feed-back loops among the

market layers that are ultimately captured by the Price Reporting Agencies (PRAs), like

Argus. It is well known that the majority of oil is traded by bilateral, long-term contracts,

but what is not known is that in the last years, most oil producers switched from a pricing

formula benchmarked to Spot markets to a pricing formula benchmarked either to Futures

Contracts20 (or a sample of them) or to price indexes reported by PRAs, like the ASCI.21

Furthermore, the financial layers of the market (the so called “paper market”) are

constantly monitored by the PRAs with the aim of establishing the market price of oil. This

happens because it is generally accepted that Spot markets, primarily the Middle-East

ones, are very illiquid and therefore, operators in every segment of the oil market play on

Futures/Option/Swap markets in order to hedge from price fluctuations, shipment delays

and innovation in other market’s layers. The concept is that the level of the oil price is set

in the Futures markets and the financial layers, such as Swaps and Forwards, set the price

differentials. By trading differentials, market players limit their exposure to risks of time,

location, grade and volume. These differentials are then used by oil reporting agencies to

identify the price level of a physical benchmark. In what follows, we can no longer clearly

divide the financial speculation from the activity of market fundamentals. In the words of

Fattouh (2011), we can’t

20 The pricing may be based on physical benchmarks such as Dated Brent or on the financial layers

surrounding these physical benchmarks such as the Brent Weighted Average (BWAVE), which is an index

calculated on the basis of prices obtained in the Brent Futures market. Specifically, the BWAVE is the

weighted average of all Futures price quotations that arise for a given contract of the futures exchange during

a trading day, with the weights being the shares of the relevant volume of transactions on that day. Major oil

exporters such as Saudi Arabia, Kuwait and Iran use BWAVE as the basis of pricing crude exports to Europe.

21 Argus Sour Crude Index (ASCI) replaced WTI in the pricing formula of Middle East export to the

USA. The fundamentals of the current pricing system have remained the same since the mid 1980s: the price

of oil is set by the market with PRAs making use of various methodologies to reflect the market price in their

assessments and making use of information in the financial layers surrounding the global benchmarks.

26



“assume that the process of identifying the price of benchmarks can be isolated

from financial layers. [..] As our analysis shows, the different layers in the oil

market are highly interconnected and form a complex web of links, all of which

play a role in the price discovery process. The information derived from

financial layers plays an important role in identifying the price level of the

benchmark. In the Brent market, the price of Dated Brent is assessed using

information from many layers including CFDs, Forward markets, EFPs and

Futures markets. Similarly, in the WTI complex, the prices of the various

physical benchmarks are strongly interlinked with the Futures markets. The

price of Dubai is often derived using information from the very active OTC

Dubai/Brent Swaps market and the inter-Dubai Swap market. Thus, the idea

that one can isolate the jointly or co-determined in both layers, depending on

differences in timing, location and quality”.

Concluding remarks

Energy markets in OECD countries have undergone a process of deregulation/privatisation,

which began in the 1990s, and which ultimately led to a full financialisation process that

occurred in the second half of the 2000s in all four major energy commodities: oil, gas, coal

and electricity. Financialisation of energy markets developed primarily throughout Futures

Contracts and secondarily with Options, with different degree of success: oil markets now

display a very high degree of financialisation and market liquidity, and have become fully

globalised, while coal markets still lag behind, with low market liquidity and volumes,

mainly traded on regional Spot markets or bilaterally. Gas markets fall in the middle of

these two extremes, being very liquid in the USA and the UK while still being mainly

centrally controlled in continental Europe, where, however, wholesale markets are

beginning to take root on the electronic platforms provided by companies managing

electricity and ETS trades. Electricity wholesale markets are of a very different nature,

being regional for technical reasons. Spot electricity markets achieved a significant liquidity

in the EU in recent decades, with Spot trades now accounting for more the half of the

27



electricity consumed. However, due to the structure of the market which is shaped by EU

regulations, penetration of speculators is still marginal and mainly limited to the Forward

market, whereas most of the volumes are traded on day-ahead markets, by utilities,

distribution companies, traders and other sector’s operators.

In spite of this tide of financialisation and contrary to expectations (or desires?), retail price

reductions did not follow and volatility in most sectors increased on a quarterly basis. Many

argue that the increase in energy prices was caused by oil prices, rather than

financialisation and indeed, what is more striking of 21st century trends in comparison to

the two previous decades, is that the retail prices of energy in any sector began co-moving

with oil prices in a coherent fashion. The Pearson correlation of energy prices in OECD

countries grew dramatically, when comparing the two time intervals: 1980-2000 with 2001-

2013.

The reasons why the financialisation of energy markets brought about a higher, almost

perfect, correlation between energy commodities, even those that were formerly anti-

correlated and oil, is still unclear. Some argue that this strict correlation depends on the

higher integration of financial markets with commodity markets caused by a massive

indexed investment that began in the 2000s. The so-called commodity bubble produced,

between 2004 and 2008, a large inflow of money from the financial sector to the commodity

market, which was previously unbound to the highs and lows of the stock exchange, by

institutional investors who began to look at Futures on commodities to hedge from the

pitfalls of equities and bonds. The speculative behaviour of these big investors eventually

interlocked the Futures commodity market, starting with the oil market, to the swinging of

the stock market. Truly, there is convincing evidence that commodities in the index of big,

institutional investors displayed a significantly higher correlation to oil when compared to

commodities not included in the index.

It is noteworthy that correlation started to increase in 2004 (for example, in Figure 18 the

two correlation curves of in-indexed and off-indexed commodities start decoupling in the

year 2004). The UN report on the financialisation of commodity markets also found

28



empirical evidence to support 2004 being the turning point in the correlation between oil

prices and several economic quantities, like commodity indices and currency exchange

ratios (UN, 2011). Interestingly, some studies indicate that 2004 is the year when Futures oil

markets have been flooded by money, boosting volumes of contracts (Turner et al, 2011).

Kaufmann suggests that there is empirical evidence which shows that from 2004, price

innovations in the oil market came from Futures markets rather than Spot markets

(Kaufmann, 2011). Fattouh (2010;2011), also highlights the increasing role of Futures

markets in the price formation of oil, suggesting though that the price-level of oil is

currently set on Futures market by physical players rather than financial players. (Our

study on the generalised Hurst exponent of Spot and Futures oil prices at the NYMEX

confirm that 2004 is a pivotal year in the oil market and corroborate the hypothesis that

some structural change occurred in both the Futures (and prominently the Contract 1) and

Spot markets. The dramatic decrease in multifractality which occurred in 2004 suggests a

flattening of the time horizon in oil markets and the merging of long-termism with short-

termism. This notion seems to confirm the view of Fattouh who claims that it is no longer

possible to distinguish sharply between financial and physical layers in the oil market

structure, although it is possible to differentiate between Spot purely speculative actors

and sector’s operators (Fattouh, 2010).

However, one conclusion can be drawn: Futures markets are now the place where the oil

price level is set and this is particularly true since 2004, when the integration of markets

and the flattening of the time horizon began. Furthermore, this process clearly depended

on the financialisation of commodity markets, starting with the oil market. How and why

this happened in that particular year remains an open question that needs more research

and investigation.

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Table Error! No sequence specified. Top ten traded products at NYMEX (New York), year

2013. Source: NYMEX.

Product name Sub Group Volume (adv.

daily lots)

Open Interest

Crude Oil Futures Crude Oil 554.905 1.503.283

Henry Hub Natural Gas Natural Gas 203.791 933.270

RBOB Gasoline Physical Futures Refined Products 143.798 288.175

NY Harbor ULSD Futures Refined Products 112.423 387.752

Crude Oil Options Crude Oil 111.856 2.469.637

Brent Last Day Financial Futures Crude Oil 81.632 133.086

Natural Gas Options (European) Natural Gas 42.973 3.889.864

ISO New England Mass Hub Day-Ahead Off-

Peak MW Futures

Electricity 12.888 330.635

Henry Hub Natural Gas Last Day Financial

Futures

Natural Gas 11.489 1.816.402

Natural Gas Options Natural Gas 7.010 129.145

Table Error! No sequence specified. Structural change in correlation between energy

prices and oil price, European OECD countries. Source: IEA

volatility correlation with oil

1980-2000 2001-2014 1980-2000 2001-2014

Electricity

Households

-19,42% 27,88% -71,13% 93,18%

Electricity Industry -18,75% 29,72% -68,75% 91,72%

Steam coal elect.

Gen.

24,63% 39,69% 17,64% 91,73%

Coal steam

household

15,74% 31,55% 5,38% 90,75%

Gas households -9,17% 33,07% -26,69% 90,27%

Diesel automotive -21,78% 31,52% -36,59% 98,47%

33



Table Error! No sequence specified. Structural change in correlation between energy

prices and oil price, OECD countries. Source: IEA

volatility correlation with oil

1980-2000 2001-2014 1980-2000 2001-2014

Electricity

Households

-13,84% 23,94% -67,85% 92,45%

Electricity Industry -10,17% 30,18% -59,65% 92,15%

Steam coal elect.

Gen.

12,81% 30,09% 45,59% 91,79%

Coal steam

household

15,74% 31,55% 4,66% 90,93%

Gas households -17,84% 24,90% -51,18% 84,56%

Diesel automotive -18,28% 33,00% -22,60% 99,07%

Table Error! No sequence specified. Spot and Future Contracts, figure 10.

RWTC Cushing, OK WTI Spot Price FOB (Dollars per Barrel)

RBRTE Europe Brent Spot Price FOB (Dollars per Barrel)

RCLC1 Cushing, OK Crude Oil Future Contract 1 (Dollars per Barrel)




34



Figure Error! No sequence specified. ICE Futures crude oil Brent, volumes. Source: ICE

35



Figure Error! No sequence specified. Diesel retail price in selected OECD countries.

Source: IEA

0

0,5

1

1,5

2

2,5

3

Q1

-197

8

Q4

-197

8

Q3

-197

9

Q2

-198

0

Q1

-198

1

Q4

-198

1

Q3

-198

2

Q2

-198

3

Q1

-198

4

Q4

-198

4

Q3

-198

5

Q2

-198

6

Q1

-198

7

Q4

-198

7

Q3

-198

8

Q2

-198

9

Q1

-199

0

Q4

-199

0

Q3

-199

1

Q2

-199

2

Q1

-199

3

Q4

-199

3

Q3

-199

4

Q2

-199

5

Q1

-199

6

Q4

-199

6

Q3

-199

7

Q2

-199

8

Q1

-199

9

Q4

-199

9

Q3

-200

0

Q2

-200

1

Q1

-200

2

Q4

-200

2

Q3

-200

3

Q2

-200

4

Q1

-200

5

Q4

-200

5

Q3

-200

6

Q2

-200

7

Q1

-200

8

Q4

-200

8

Q3

-200

9

Q2

-201

0

Q1

-201

1

Q4

-201

1

Q3

-201

2

Q2

-201

3

Q1

-201

4

Diesel - households ($/Liter)

Australia Austria Finland France Germany Greece

Ireland Italy Netherlands New Zealand Portugal Spain

Sweden Switzerland United Kingdom United States OECD Europe OECD Total

36



Figure Error! No sequence specified. Liquidity of NG Spot market in the EU, 2013. Source:

Wagner, Elbling & Co.

37



Figure Error! No sequence specified. NG retail price in households sector, selected OECD

countries. Source: IEA

0

20

40

60

80

100

120

140

160

Q1-

19

78

Q4-

19

78

Q3-

19

79

Q2-

19

80

Q1-

19

81

Q4-

19

81

Q3-

19

82

Q2-

19

83

Q1-

19

84

Q4-

19

84

Q3-

19

85

Q2-

19

86

Q1-

19

87

Q4-

19

87

Q3-

19

88

Q2-

19

89

Q1-

19

90

Q4-

19

90

Q3-

19

91

Q2-

19

92

Q1-

19

93

Q4-

19

93

Q3-

19

94

Q2-

19

95

Q1-

19

96

Q4-

19

96

Q3-

19

97

Q2-

19

98

Q1-

19

99

Q4-

19

99

Q3-

20

00

Q2-

20

01

Q1-

20

02

Q4-

20

02

Q3-

20

03

Q2-

20

04

Q1-

20

05

Q4-

20

05

Q3-

20

06

Q2-

20

07

Q1-

20

08

Q4-

20

08

Q3-

20

09

Q2-

20

10

Q1-

20

11

Q4-

20

11

Q3-

20

12

Q2-

20

13

Q1-

20

14

Natural gas - households ($/MWh)

Belgium Canada Finland France Germany

Ireland Italy Portugal Spain Switzerland

United Kingdom United States OECD Europe OECD Total

38



Figure Error! No sequence specified. Steal coal, retail price in selected OECD countries.

Source: IEA

Figure Error! No sequence specified. Liquidity of the European electricity wholesale

market, 2010-13. Source: UE

0

20

40

60

80

100

120

140

160

180

200

Q1

-19

78

Q4

-19

78

Q3

-19

79

Q2

-19

80

Q1

-19

81

Q4

-19

81

Q3

-19

82

Q2

-19

83

Q1

-19

84

Q4

-19

84

Q3

-19

85

Q2

-19

86

Q1

-19

87

Q4

-19

87

Q3

-19

88

Q2

-19

89

Q1

-19

90

Q4

-19

90

Q3

-19

91

Q2

-19

92

Q1

-19

93

Q4

-19

93

Q3

-19

94

Q2

-19

95

Q1

-19

96

Q4

-19

96

Q3

-19

97

Q2

-19

98

Q1

-19

99

Q4

-19

99

Q3

-20

00

Q2

-20

01

Q1

-20

02

Q4

-20

02

Q3

-20

03

Q2

-20

04

Q1

-20

05

Q4

-20

05

Q3

-20

06

Q2

-20

07

Q1

-20

08

Q4

-20

08

Q3

-20

09

Q2

-20

10

Q1

-20

11

Q4

-20

11

Q3

-20

12

Q2

-20

13

Q1

-20

14

Steam coal - eectricity generation ($/tonne)

Belgium Finland France Germany Italy

Japan Portugal Spain Sweden Turkey

United Kingdom United States OECD Europe OECD Total

39



Figure Error! No sequence specified. Retail electricity price in the households sector,

selected OECD countries. Source: IEA

0,00

50,00

100,00

150,00

200,00

250,00

300,00

350,00

400,00

450,00

Q1

-19

78

Q4

-19

78

Q3

-19

79

Q2

-19

80

Q1

-19

81

Q4

-19

81

Q3

-19

82

Q2

-19

83

Q1

-19

84

Q4

-19

84

Q3

-19

85

Q2

-19

86

Q1

-19

87

Q4

-19

87

Q3

-19

88

Q2

-19

89

Q1

-19

90

Q4

-19

90

Q3

-19

91

Q2

-19

92

Q1

-19

93

Q4

-19

93

Q3

-19

94

Q2

-19

95

Q1

-19

96

Q4

-19

96

Q3

-19

97

Q2

-19

98

Q1

-19

99

Q4

-19

99

Q3

-20

00

Q2

-20

01

Q1

-20

02

Q4

-20

02

Q3

-20

03

Q2

-20

04

Q1

-20

05

Q4

-20

05

Q3

-20

06

Q2

-20

07

Q1

-20

08

Q4

-20

08

Q3

-20

09

Q2

-20

10

Q1

-20

11

Q4

-20

11

Q3

-20

12

Q2

-20

13

Q1

-20

14

Electricity -households ($/MWh)

Denmark Finland Germany Italy Norway

Portugal Switzerland United States OECD Europe OECD Total

40



Figure Error! No sequence specified. Retail electricity price in the industry sector,

selected OECD countries. Source: IEA

0

50

100

150

200

250

300

350

400

Q1

-19

78

Q4

-19

78

Q3

-19

79

Q2

-19

80

Q1

-19

81

Q4

-19

81

Q3

-19

82

Q2

-19

83

Q1

-19

84

Q4

-19

84

Q3

-19

85

Q2

-19

86

Q1

-19

87

Q4

-19

87

Q3

-19

88

Q2

-19

89

Q1

-19

90

Q4

-19

90

Q3

-19

91

Q2

-19

92

Q1

-19

93

Q4

-19

93

Q3

-19

94

Q2

-19

95

Q1

-19

96

Q4

-19

96

Q3

-19

97

Q2

-19

98

Q1

-19

99

Q4

-19

99

Q3

-20

00

Q2

-20

01

Q1

-20

02

Q4

-20

02

Q3

-20

03

Q2

-20

04

Q1

-20

05

Q4

-20

05

Q3

-20

06

Q2

-20

07

Q1

-20

08

Q4

-20

08

Q3

-20

09

Q2

-20

10

Q1

-20

11

Q4

-20

11

Q3

-20

12

Q2

-20

13

Q1

-20

14

Electricity - industry ($/MWh)

Austria Denmark Finland Germany Italy

Norway Portugal Switzerland United Kingdom United States

41



Figure Error! No sequence specified. Generalised Hurst exponent in oil markets, Spot and

Futures. Source: our estimations on DOE-IEA data (Legend: Table 4 ).

Figure Error! No sequence specified. Multifractality of the Brent Spot Market, 2001-2013

42



Figure Error! No sequence specified.Multifractality of the WTI Spot Market, 2000-2013

Figure Error! No sequence specified. Multifractality of Oil Futures Market at NYMEX,

Contract 1, 1997-2013.

43



Figure Error! No sequence specified. Multifractality of Oil Futures Market at NYMEX,

Contract 2, 2000-2013

Figure Error! No sequence specified. Multifractality of Oil Futures Market, Contract 3,

1998-2013

44



Figure Error! No sequence specified. Multifractality of Oil Futures Market, Contract 4,

2000-2013

45



Figure Error! No sequence specified. Correlation between energy retail prices and oil

import price, European OECD countries. Source: IEA

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

Q1

-19

78

Q1

-19

79

Q1

-19

80

Q1

-19

81

Q1

-19

82

Q1

-19

83

Q1

-19

84

Q1

-19

85

Q1

-19

86

Q1

-19

87

Q1

-19

88

Q1

-19

89

Q1

-19

90

Q1

-19

91

Q1

-19

92

Q1

-19

93

Q1

-19

94

Q1

-19

95

Q1

-19

96

Q1

-19

97

Q1

-19

98

Q1

-19

99

Q1

-20

00

Q1

-20

01

Q1

-20

02

Q1

-20

03

Q1

-20

04

Q1

-20

05

Q1

-20

06

Q1

-20

07

Q1

-20

08

Q1

-20

09

Q1

-20

10

Q1

-20

11

Q1

-20

12

Q1

-20

13

Q1

-20

14

OECD Europe, retail prices of various energy commodities and oil, bas year= 1980

Electricity Households Electricity Industry Steam coal elect. Gen. Coal steam hosehold

GAS hoseholds Diesel automotive Oil import costs

46



Figure Error! No sequence specified. Correlation between retail energy prices and import

oil price, OECD. Source: IEA

0

1

2

3

4

5

6

7

Q1

-19

78

Q1

-19

79

Q1

-19

80

Q1

-19

81

Q1

-19

82

Q1

-19

83

Q1

-19

84

Q1

-19

85

Q1

-19

86

Q1

-19

87

Q1

-19

88

Q1

-19

89

Q1

-19

90

Q1

-19

91

Q1

-19

92

Q1

-19

93

Q1

-19

94

Q1

-19

95

Q1

-19

96

Q1

-19

97

Q1

-19

98

Q1

-19

99

Q1

-20

00

Q1

-20

01

Q1

-20

02

Q1

-20

03

Q1

-20

04

Q1

-20

05

Q1

-20

06

Q1

-20

07

Q1

-20

08

Q1

-20

09

Q1

-20

10

Q1

-20

11

Q1

-20

12

Q1

-20

13

Q1

-20

14

OECD, retail prices of various energy commodities and oil, bas year= 1980

Electricity Households Electricity Industry Steam coal elect. Gen.

Coal steam hosehold GAS hoseholds Diesel automotive

47



Figure Error! No sequence specified. Correlation with oil price of Indexed commodities

and off-index commodities. Source: Ke Tang and Wei Xiong, 2010.

48



Financialisation, Economy, Society and Sustainable Development (FESSUD) is a 10 million

euro project largely funded by a near 8 million euro grant from the European Commission

under Framework Programme 7 (contract number : 266800). The University of Leeds is the

lead co-ordinator for the research project with a budget of over 2 million euros.

THE ABSTRACT OF THE PROJECT IS:

The research programme will integrate diverse levels, methods and disciplinary traditions

with the aim of developing a comprehensive policy agenda for changing the role of the

financial system to help achieve a future which is sustainable in environmental, social and

economic terms. The programme involves an integrated and balanced consortium involving

partners from 14 countries that has unsurpassed experience of deploying diverse

perspectives both within economics and across disciplines inclusive of economics. The

programme is distinctively pluralistic, and aims to forge alliances across the social

sciences, so as to understand how finance can better serve economic, social and

environmental needs. The central issues addressed are the ways in which the growth and

performance of economies in the last 30 years have been dependent on the characteristics

of the processes of financialisation; how has financialisation impacted on the achievement

of specific economic, social, and environmental objectives?; the nature of the relationship

between financialisation and the sustainability of the financial system, economic

development and the environment?; the lessons to be drawn from the crisis about the

nature and impacts of financialisation? ; what are the requisites of a financial system able

to support a process of sustainable development, broadly conceived?’

49



THE PARTNERS IN THE CONSORTIUM ARE:

Participant Number Participant organisation name Country

1 (Coordinator) University of Leeds UK

2 University of Siena Italy

3 School of Oriental and African Studies UK

4 Fondation Nationale des Sciences Politiques France

5 Pour la Solidarite, Brussels Belgium

6 Poznan University of Economics Poland

7 Tallin University of Technology Estonia

8 Berlin School of Economics and Law Germany

9 Centre for Social Studies, University of Coimbra Portugal

10 University of Pannonia, Veszprem Hungary

11 National and Kapodistrian University of Athens Greece

12 Middle East Technical University, Ankara Turkey

13 Lund University Sweden

14 University of Witwatersrand South Africa

15 University of the Basque Country, Bilbao Spain

The views expressed during the execution of the FESSUD project, in whatever form and or

by whatever medium, are the sole responsibility of the authors. The European Union is not

liable for any use that may be made of the information contained therein.

Published in Leeds, U.K. on behalf of the FESSUD project.

50



changes in the relationship between the financial and real sector

Documents